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EUR/USD Tipped to "Return Towards 1.0600/1.0650 in Coming Days"

November 8, 2023 - Written by Ben Hughes


After peaking just above 1.0750 on Monday, the Euro to Dollar exchange rate (EUR/USD) has lost ground steadily and retreated to 1.0660 on Wednesday before stabilising.

According to ING; “EUR/USD may continue its gradual return towards 1.0600/1.0650 in the coming days.”

Hawkish Fed rhetoric and Euro-Zone recession fears have hurt the Euro.

Euro-Zone data has remained generally weak with a particular focus on Germany.

German industrial production declined 1.4% for September after a 0.1% decline previously, although there was a 0.2% gain in factory orders.

Jussi Hiljanen, head of rates strategy at SEB commented; "German industrial production fell more than expected, with most sub-sectors showing negative monthly readings. As such it adds to the picture of the stalling euro area economy."

ING added; “With today’s data, industrial production would have to increase by at least 2% MoM in the coming months to bring production back into positive territory in the fourth quarter. Even though there isn’t any hard data for the fourth quarter yet, recent developments have clearly increased the risk that the German economy will end the year in recession.”

Wells Fargo economist Nick Bennenbroek commented; "The mixed outlook for consumer and investment spending leaves the euro zone very close to recession."

He added; "Regardless of whether the euro zone falls into recession, we see enough growth headwinds to suggest that the European Central Bank's monetary tightening is done."

The pricing in derivatives markets indicated that there is no real chance of interest rates being increased again.

Markets are also pricing in around 95 basis points of easing by the end of 2024 compared with around 80 basis points two weeks ago.

According to ING; “the dovish ECB repricing is based on more solid evidence of an economic slowdown, meaning it should be harder for ECB members to convince markets to price out cuts.

NBF doubts whether any Euro gains are sustainable; “It would be fair to say that the current improvement is not predicated on a sizeable enhancement of the economic situation. Moreover, the central bank has almost assuredly reached the endpoint of tightening monetary policy.

It adds; “While the Euro has seen some appreciation recently, it was reflective of a weaker US Dollar. We continue to see weakness for the European currency in the coming quarters with the potential for some improvement later in 2024.”

HSBC expects US out-performance will continue to underpin the dollar; “The USD should continue to capitalise on the US growth resilience, when compared to continued growth disappointments outside the US. As the full impact of earlier rate hikes becomes evident, the prospect of slower global economic growth into 2024 should also support the USD.”

In comments on Tuesday, Governor Bowman maintaining the potential for further interest rate hikes.

J P Morgan expects near-term stability from the US central bank; “The Fed will remain data dependent going forward, and having now paused hiking rates for two consecutive meetings this suggests they are willing to exercise patience and proceed carefully.”

It also expects an extended reluctance to cut interest rates; “While a reacceleration in growth and/or inflation could prompt another rate hike either in December or early next year, short-term bumps in a downward trending economy likely keep the Fed on hold well into 2024.”

Commerzbank notes the importance of near-term central bank rhetoric from both the ECB and Federal Reserve.

From a longer-term perspective, the bank was more cautious on the dollar and added; “we would also like to point out that the strong reaction last week was a first taste of how the FX market might react if signs of a recession in the US were to emerge – as our economists expect.”

According to UoB EUR/USD is near key support; “While upward momentum has waned somewhat, only a breach of 1.0640 (no change in ‘strong support’ level from yesterday) would indicate that 1.0770 is out of reach.”
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